The Most Irrational Oil Fear

Summary

Along with slowing demand fears and a persistent glut, there’s plenty of fear to go around concerning oil.One category that is being way overblown, however, relates to fears that oil storage is nearing full capacity.While oil inventories are hovering near all-time highs, the fact of the matter is that tanks aren’t even close to be full. This removes the possibility of a firesale in this space and suggests that investors should be focused more on supply and demand moving forward.

Earlier this year, I wrote about the oil storage situation facing the U.S. and how data suggested that the oil situation wasn’t anywhere near as bad as many investors may fear. Now, with total petroleum product inventories near all-time highs and with new storage data available, I figured it would be a good idea to jump back into the topic in an effort to see whether the situation still looks positive or whether investors in the oil space should be scared of what is going on.

A look at how storage data works

As in the past, I figured it might be a good idea to show my readers the ins and outs of the storage data provided by the EIA (Energy Information Administration). The organization reports two separate types of storage capacity; net available shell capacity and working storage capacity. In the first type, the organization looks at the absolute maximum amount of storage space that can be used up before no extra product can be added into the mix. Working storage capacity, on the other hand, looks at the amount that can be stored without factoring in contingency space and without looking at any additional space at the tank bottom that exists. You can see an image below, which provides an illustration of the differences between the two types, courtesy of the EIA.

(click to enlarge)

For the sake of conservatism, I will use the working storage capacity data in this analysis but it is important to know how much extra petroleum product could be stored if push came to shove (a true and massive glut). In addition to the data we will look at below, using the net available shell capacity definition of storage space would result in an extra 306.9 million barrels of petroleum product capacity that could, in theory, be tapped. Adding in idle capacity (estimated storage capacity that could be brought online within 90 days), we would see capacity grow by a further 60.7 million barrels.

We aren’t even close to full

At this point in time, the EIA projects that there exists about 551.2 million barrels of working storage capacity for crude alone. With crude storage standing at 484.8 million barrels, this implies that storage is about 87.9% full. While this may look alarming at first glance, however, the EIA has stated that about 120 million barrels of crude is held in pipelines at any given time and are, in essence, flowing through the product channel instead of actually being stored. Because of this, these barrels should not be counted in the storage capacity data they provide. After taking these from the equation, we see that crude oil storage is only 66.2% full at 364.8 million barrels, well below the point where investors should be concerned.

For the sake of conservatism, I will use the working storage capacity data in this analysis but it is important to know how much extra petroleum product could be stored if push came to shove (a true and massive glut). In addition to the data we will look at below, using the net available shell capacity definition of storage space would result in an extra 306.9 million barrels of petroleum product capacity that could, in theory, be tapped. Adding in idle capacity (estimated storage capacity that could be brought online within 90 days), we would see capacity grow by a further 60.7 million barrels.

(click to enlarge)

Of course, crude isn’t the only area of concern that should be addressed. In theory, if a large glut occurs in any petroleum product category, it could warrant a sharp downturn in prices for crude as a whole. To account for this, I looked at motor gasoline, fuel ethanol, distillate fuel, residual fuel oil, propane/propylene, and the “other” categories that are covered by the EIA. In the table below, you can see what the situation looks like for each type of product in terms of working storage capacity, how much product is currently in storage, and the ratio of stored product to storage capacity.

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